How Do I Apply for SBA Loans?
You can apply for SBA loans via an SBA approved lender. There are hundreds of SBA approved lenders. Therefore, finding the appropriate lender can be a daunting task. I strongly suggest that you consult with an SBA financing expert before you attempt to find an SBA lender. An experienced and knowledgeable SBA financing expert will be able to help you determine the type of SBA financing that will work best for you.
How Much SBA Financing Can I Get?
The amount of SBA financing you can obtain depends on the SBA loan program you are applying for. SBA funding amounts range from$5,000 to as much as $5,000,000. The amount you obtain will be determined based on your personal credit history, income, personal and business assets, your business revenue, and your business needs. Again, the right SBA financing expert will be able to determine how much financing you should ask for on your SBA loan application.
Which SBA Loan Program Should I Apply for?
Simply put, you should apply for the SBA loan program that can best meet your business funding needs. In addition, you should also apply for the SBA loan program that you most likely qualify for. If you know you can’t pledge physical collateral (e.g. commercial real estate), it will probably be better to apply for the SBA loan program that doesn’t require that. Furthermore, each SBA loan program requires the funds to be used for certain business expenses. If you need funding for the purchase of commercial real estate (to operate your business), you wouldn’t apply for a microloan (since the funds can’t be used for that purpose). An SBA financing expert will help you determine which SBA loan program will be the most suitable for you.
What Should I Expect During the SBA Loan Closing Process?
As you’ve come to understand it, getting the actual funding from an SBA loan takes some time. It doesn’t compare to the short application and quick access to cash you find with some alternative financing like unsecured lines of credit. Even with the more detailed structure, the SBA Loan closing process has improved. It’s more uniform and similar to that of traditional loans. Each SBA loan may have slight differences in closing requirements. Understanding the SBA Loan closing process gives you a general idea of what to expect. That way you know how soon you can get started growing your business. Closing comes after underwriting and processing, but it isn’t the last step. With the SBA, your loan goes through underwriting and processing, closing, loan sales, and servicing. Basically, before closing, you apply and gather required documents to prove you meet the program criteria. That’s when analysts also review your credit.
How Long Does the SBA Loan Closing Process Take?
Timing varies and depends on how soon you submit required documents and third party response time. The first step includes meeting with an SBA partner to review your business, credit, and financial situation. From there, you’ll begin the application process. That includes providing credit authorization and financial documents. Expect a one to two week wait to receive loan pre-approval and proposal letter. The formal underwriting procedure has around a two week time-frame. Wait times for third party reports determine the wait period for closing the loan. It could take anywhere from one to three weeks.
SBA Loan Underwriting
There’s another important step before getting to the actual SBA loan closing process. The documents must go through underwriting. During the initial steps of gathering information, the borrower may have to pay an underwriting fee. It covers the cost of the underwriters’ work in case the borrower backs out of the loan during the closing process.
All of this contributes to the amount of time between you applying for an SBA loan and when your business get the funds. This process determines if the borrowers is capable of managing the loan. During this process, underwriters arrange information from the borrowers that falls into five categories:
Equity: Evaluation of the debt to equity ratio. The underwriter evaluates if the borrower’s cash investment balances against outstanding debts, including the new loan.
Credit: Review of the borrower/business credit history to find out if they’ve managed debt properly. Have they handled paying other lenders on time.
Ability to repay the loan: Evaluation of sources for business and personal cash flow.
Collateral: According to the value of the collateral, reviewing if it is suitable to fit the Small Business Administration requirements. Determining how much risk the collateral requires of the borrower.
Experience in management: This gives an idea of the likelihood that the borrower can successfully maintain a business.
If evaluation from underwriters satisfies all requirements, the lender will issue a letter offering a firm commitment. If the borrower accepts the offer, they proceed to the loan closing process.
Closing on an SBA Loan
Different closing stages on the loan involve different requirements to get to officially signing. During the documentation prep stage, lenders will get the documents ready to submit to loan guaranty. It’s critical to follow directions and not have errors on the documents. Not submitting documents within the guidelines can lead to rejection. Here’s a summary of the guidelines for documentation:
Save each document in PDF format either as a collaborative or individual files. You must use specific file names according to the instructions. This helps staff to quickly identify each document, which can cut down on your processing time. It also helps with figuring out which documents are missing, so you can prevent being rejected.
Make sure your scan resolutions are high quality and easy to read. A DPI of between 200 and 600 should work. Pay attention to ensure the pages are scanned in the right direction (not upside down) and turn in all the pages in the same setting. The documents should also be accessible without needing a password to view them. Follow these directions to reduce file size:
--Scan documents in black and white.
--Turn off OCR
--Don’t include annotations or sticky notes
Before you can receive loan proceeds, you must sign certain documents. That’s where the loan closing process comes in. It gets all documents in order for you to finalize the loan. During this time, you and the lender must meet these (and possibly other) requirements:
--Promissory note, also called a “promise to pay”- this must have the borrower’s signature. On the note, you’ll find all the loan terms, including the origination date, maturity date, loan amount, loan interest rate, and any collateral requirements.
--Security documents- If you put up collateral to get the loan, government entities require certain documents for the lender to perfect the lien. Documents must be signed and filed with the appropriate government organizations.
--The lender will insure different aspects of the loan such as collateral, property titles, livelihood of borrowers and their ability to work. This protects their investment in the event that something happens to destroy or reduce the value of the property.
--A complete package with all documents from the start of the loan process: the lender’s underwriting, signed authorization for a credit and background check, government permits, etc. Third party documents could include appraisers for equipment, real estate property, or other business assets. It could also have statements from engineers for environmental assessments.
SBA Loan Closing Process for the 504 Loan
The process goes a little different with SBA 504 loans. The promissory note will not include a loan interest rate. With 504 loans, the interest and loan funding are connected to bond sales. The funds from the bond sale are what provide the loan proceeds. The price of the bonds determine the interest rate for the loan.
Those extra parts of the process prolong time between closing and loan disbursement SBA 504 loans. The steps are as follows:
Step 1: The borrower signs all legal documents as with other SBA loan closings.
Step 2: The SBA’s local district office receives all the documents and submits them to their attorneys. They review the documents to make sure lending partners and borrowers followed all SBA guidelines.
Step 3: If all documents meet the requirements, the local district office sends them to the bank. The bank reviews the documents to add them to their upcoming bond offering.
Step 4: Bonds for the 504 bonds go through underwriting, pricing, and the sale process.
Step 5: After completing the bond sales, banks wire the funds to each lending partner that approved the 504 loans.
One benefit of having to wait a little longer for funding is a lower interest rate. Lower investment risk combined with SBA loan guarantee means low interest for the borrowers. Read on to lean more about how the SBA helps “small small” businesses and how LenCred can help you apply.
Are the "Real" Small Business Owners Truly Benefiting from SBA Loans?
According to the U.S. Small Business Administration, small (Main Street) businesses such as our local convenience stores, dentist offices, accountants, bookstores, etc. (with 1 to 19 employees) make up 98% of the businesses in our society. The SBA defines small business as businesses with fewer than 500 employees. According to the U.S. Census Bureau, out of these small businesses, 75% have no additional paid employees besides the owner and average revenues of about $44,000 annually. That number is significant because it means that most of the so-called “small businesses” are actually individual people that most likely operate as a sole proprietor.
These smaller business (or what Ken Evoy of SiteSell.com calls “small small businesses”) are continuously overlooked in regards to capital access. The SBA would like to make us all think that they are genuinely helping the “small small businesses” when in reality they are not. They are helping “larger small businesses” that only make up 25% of the total number of businesses considered small (with less than 500 employees). These “small small businesses” typically need microloans up to $50k or smaller “big” loans up to $250k.
In 2008 Terry Sutherland (from the SBA Press Office), stated that the average SBA loan was about $180,000 and 24% were under $100,000. In the current economy, the average SBA loan is about $485,000 and less than 9% are under $100,000. When you think about the number of “small small business” owners there are in comparison to larger businesses, you will understand why only 9% of them receiving funding through the SBA is completely unacceptable. Based on my professional opinion, it is pertinent that the SBA focuses more on actual small businesses because they make up so many of the businesses in our society.
Investing in “Small Small Business” Has Proven to be Beneficial
According to a study conducted by the microloan lender Accion Texas, “U.S. Microfinance: Small Loans, Big Results,” lending small amounts of money ($5,000 to $50,000) to “small small business” owners has contributed to the sustainability and growth of their businesses -- specifically, job creation, sales, and revenue increases. The study found that 54% of participants who received a microloan from Accion Texas were able to hire nearly 6 new employees, 32% said their business revenue increase and 97% were still in business at least 2 years after receiving a microloan. This should serve as solid proof that an increase in lending small loans to “small small business” owners would be very beneficial to the growth of their businesses and the overall economy.
The SBA Can Help “Small Small Businesses”
It’s obvious that the SBA needs to revise its definition of a small business and re-position itself to focus on lending to businesses with the owner as the sole employee. Lending small amounts of money to lots of “small small businesses” will slowly (yet surely) increase jobs and business sustainability. The SBA's Administrator, Maria Contreras-Sweet, should be motivated and encouraged to lend to those that most banks and lenders often overlook. Small, small businesses are also critical part of our economy that should be given fair access to capital.
Can LenCred Help Me Apply for SBA Loans?
Although the LenCred team specializes in helping startups and established business owners obtain unsecured business line of credit, the team also has the knowledge and experience to guide you to the right SBA loan program and approved SBA lender. If you don’t qualify for an unsecured business line of credit, an SBA loan may be your next best option. The LenCred team will analyze your business needs (and your personal credit history) to determine what type of business financing will work best for you. Contact us today for more information on how you may be able to get an SBA loan to start or grow your small business.